Friday, November 30, 2012

It's a quiet Friday afternoon and as we know when there is nothing else to yell about "The Cliff" takes center stage. So TMM are anticipating their lines lighting up any moment with brokers yelling their word.

Remember "Word Up"?

Word up (The broker call)

Yo, pretty clients around the world
Got a disaster for you, so tell the funds and corps
Sell your Brother, your Apple and your S+P too
Cause they're about to crash down and you won't know what to do

Wave your hands in the air, it's a real scare
Scream at your punters as they start to look and stare
Do your dance, do your dance, to make em scared stiff.
Come on baby, tell 'em there's a cliff.

"Cliff up", everybody say
When you hear us call, you've got to sell it anyway
"Cliff up", Use the Cliff word
No matter how you say it, you'll know that you'll be heard.

All you sucker bulls who think it'll fly
There's got to be a reason but there ain't no reason why
You try to put on those longs and your fancy calls
But ya got to realize that you're acting like fools

If there's panic, we can use it, to pay the rents
We don't have the time for your common sense
"No 'greements", "no 'greements", is all we have to yell,
Come on baby, tell me what's the word

Wednesday, November 28, 2012

Every bar in every town in every wild remote unforgiving desolate landscape has one. No matter how ghostly the neighbourhood, how empty the streets, how dusty the tables and chairs in the room with the cracked panelling, peeling paint, and greased windows, there at the back of every bar will be a sole figure hunched over a laboured glass, stretching time until, like a curious statue, they catch the eye of the poor soul who has just walked in with a medusa stare. The victim's small vestigial ganglion of primative neurones that is their last chance of escape, cannot muster enough adrenalin to persuade the rest of their stunned nervous system to register blind panic and RUN. It is too late, for soon the creature with the glass will open its mouth and slur in a drawl:

"Did ah tell you about the days I used to run a Hedge Fund?"

There was a show in the UK called the Fast Show and one of the characters was "Archie" he was the UK's version of the creature described above. And we sorely wish he had been the early 1990s Macro Hedge fund manager...

"Hardest game in the world, yer hedge fund managing. But there was yer glory days too. I can remember when DollarYen used to move. An' I don't mean yer poxy little wobbles of today. No. I mean REALLY move. We was all at it in them days, DollarYen that is. 88 to 140 no problem, would 'appen in an afternoon. We made boat loads. RKO's was me favourite. Only just come out then an' no one knew how to price 'em proper and we just took the piss. But it was tough. Lost it all the next week on some correlation trade that didn't correlate longer than it took me to put the trade on. Hardest game in the world that hedge fund game... Do you want to get me a drink?"

Yes... USD/JPY was the weapon of choice for many an old Hedge fund warrior.

But TMM are detecting a deep infrasound. A low rumble mostly detectable through the feet rather than the ears. And its intensity is growing as USD/JPY climbs higher, accompanied by ghostly clanks of armour and distant warrior cries as the call to arms rejoins across the world, summoning forth the once brave and mighty from their slumbering hollows, bars and Bide-Awee rest homes for Hedge fund managers, to once again rise and fight the old foe... THE YEN.

TMM have been lucky enough to have made decent cash on the move higher since the end of September, but in true dedication to one of their main mottos - "USDJPY will be not be easy" - have taken off most of their exposure, only really having a token position to "intellectually be in it". The recent commentary from PM-to-be Abe that FX intervention won't work, and the seeming clarification that a change in the BoJ Law is not in the LDP manifesto have obviously taken some of the shine off the trade. But TMM think it's a bit more subtle than that as he also continued to pile the pressure on the BoJ to meet a 2% inflation target while arguing for a fiscal response in concert with monetary policy.

Now, orthodoxy would suggest that loose fiscal policy coupled with loose monetary policy in the context of a very poor Balance of Payments position (see chart below) is bad for a currency as expected returns on domestic assets are not enough (as monetary policy prevents them from rising) to bring in capital flows. Similarly, government policies aimed at encouraging domestic investors to send funds abroad for M&A/FDI are keeping the needle pointing away. You don't need FX intervention to weaken a currency if the fundamentals look like this - it will weaken anyway.

Up until recently, TMM had been sceptical of the "short Yen" trade that has continually confounded punters, partially a result of the fact that US rates are so low. So it is clearly worth questioning why this time is likely to be any different? And TMM reckon that the above alignment of policies mean that domestic investors, hitherto the primary driver of the rates/FX relationship, have less incentive to own Yen as the rates relationship is really a "real rate" relationship - and pushing for a 2% inflation target de jure means a rise in expected inflation and commensurate fall in Japanese real rates. Shirakawa & Co. may not believe that that is possible, but the evidence in the US & UK suggests that aggressive easing has indeed kept inflation expectations high. The other consistent buyer of the Yen - exporters, who have consistently hedged receipts have discovered those receipts evaporating in the face of Korean competition and the need to import energy appearing to have become more structural. TMM must admit to being very surprised that the Nuclear plants have not been quietly switched back on.

It almost seems to TMM as Keidanren have finally spurred The Establishment to accept that protecting The Post Office (and pensions) is no longer as important as the potential collapse of Japan Inc. And if that is so, it would arguably be the biggest change to macroeconomic policymaking in Japan for a decade. Not to be ignored.

However...It is the end of November. And the election is in just over two weeks. The move has been dramatic, and *everybody* TMM speak to loves the trade. Which makes TMM nervous, as profit taking into yearend takes hold, the fact that many structures have been put on such as RKOs which have caused people's exposure to evaporate and then buy spot at poor levels. And it's not as if the policy is going to be implemented in two weeks time. TMM therefore reckon that the risk of a Yen washout in the near term probably outweighs the opportunity cost of "missing the move" and have trimmed most of their position, with a view to putting it back on 30th December in anticipation of the traditional piling on of New Year 2013 trades.

—————————————

How it may ultimately end... the script:

George : You fight with the strength of many men, sir Yen.

(The Yen does not respond)

George : I am George, King of the Hedge Funds.

(no response)

George : I seek the finest and the bravest in the land to join me at my family office in New York.

(no response)

George : You have proved yourself worthy. Will you join me?

(no response)

George : You make me sad. So be it! Come, Stanley.

(As George and Stanley start to ride past the Yen, he suddenly speaks)

Yen : NONE SHALL PASS.

George : (taken aback) What?

Yen : NONE SHALL PASS.

George: I have no quarrel with your good support, but I must cross this level.

Yen : THEN YOU SHALL DIE.

George : I command you, as King of the Hedge Funds, to stand aside.

Yen : I MOVE FOR NO MAN.

George : So be it!(draws sword)

(A short battle ensues, where George, relatively unencumbered by regulations and committee mentality, easily dodges the slow and heavy responses of the Yen. Finally, George dodges exporter selling, steps aside, and cuts the Yen’s left arm off with his RKO’s. Profit spurts from the Yen's open wound.)

George : Now stand aside, worthy adversary.

Yen : 'Tis but a scratch.

George : A SCRATCH? Your old BoJ governor is off!

Yen : No it isn't!

George : Well what's that then? (pointing to Shirakawa lying on the ground)

Yen : I've had worse.

George : You LIAR!

Yen : Come on, you low VaR lightweight!

(There follows an even shorter foray, George easily cuts through the Yen's upper support, causing it and the Yen's current account to drop to the ground. Profit spatters freely from the stump.)

George : Victory is mine! (kneeling, praying) We thank thee Lord, that in thy mercy-- He is kicked onto his side by the Yen.

Yen : Come on, then! (kicks George again)

George : (on the ground) What?!?

Yen : (kicking him again) Have at you!

George : (getting up) You are indeed brave, sir Yen, but the fight is mine!

Yen : Ohhh, had enough, eh?

George : Look, you stupid bastard, you've got no exports left!

Yen : Yes I have

George : LOOK!!!

Yen : Just a flesh wound! (kicking George again)

George : Look, STOP that!

Yen : Chicken!!! Chicken!!!!!!!

George : Look, I'll have your JGBs!

(The Yen continues his kicking)

George : RIGHT!(He chops off the Japanese Post Office with his sword)

Yen : (hopping) Right! I'll do you for that!

George : You'll WHAT?

Yen : Come 'ere!

George:(tiring of this) What're you going to do, tax me to death?

Yen : I'm INVINCIBLE!!!

George : You're a looney....

Yen : No I'm a Yen and The Yen ALWAYS TRIUMPHS! Have at you!! (hopping around, trying to kick George with his one remaining leg)

(George shrugs his shoulders and, with a mighty swing, removes the Yen's last limb. The Yen falls to the ground. He looks about, realizing he can't move.)

Wednesday, November 21, 2012

a) A time to remember and give thanks for coming through dark times.
b) A time for family.
c) A time to make wide prices and ram stops.
d) A time for pretending you are an American even if you aren't and going to lunch all day.

2. Turkey is

a) Better if basted in butter and herbs
b) My book this year.
c) Trading 160bp over US 10yr
d) The home to amusing sounding companies such as "Arcelik"

3. Cranberries are

a) Used to make a sauce to accompany the Thanksgiving Turkey.
b) A 1990's Irish music group.
c) A euphemism for irksome troubles in one's derriere
d) The names of the next regulatory packages designed to straight-jacket finance.

4. Stuffing is

a) Sage and onion.
b) What I am getting in long vol positions.
c) What HP is accusing Autonomy's books of containing.

5. Pumpkin Pie is

a) A pie consisting of pumpkin based custard.
b) A mathematical constant used for working out the volume of pumpkins.
c) The code name used when describing the efficacy of cancer treatments to non-specialists.
d) A term employed by males to address their spouse just before supplying an implausible excuse for malfeasance.

6. Black Friday is

a) Something to do with shopping on which all retail hopes lie.
b) A large stock market crash.
c) A technical signal involving eclipses.
d) How you feel after Monster Thursday Night.

7. A Thanksgiving Parade is

a) A parade that features a variety of floats and marching bands.
b) Best watched on TV whilst vegging out.
c) A sly bit of department store marketing.
d) Mr Stupid charging around the dealing room punching the air screaming "Yes, Oh yes" claiming genius after a random event yields him a profit.

8. Thanksgiving Football matches are

a) A traditional activity giving families an additional focus to their day.
b) Not Soccer
c) The EU and IMF negotiations over Greece.

9. The Presidential Turkey

a) Each Thanksgiving Day since 1947, the President of the United States has been presented with three turkeys by the National Turkey Federation. One live turkey is pardoned and gets to live the rest of its life on a quiet farm; the other two are dressed for the Thanksgiving meal.
b) Each Thanksgiving Day since 1947, a turkey has been presented with three potential Presidents by political parties. One is pardoned and gets to live the rest of its life on a quiet farm; the other two are dressed for an election.
c) The winner of b)

10. Which of the below are quotations from Thanksgiving

a) "Let us remember that, as much has been given us, much will be expected from us, and that true homage comes from the heart as well as from the lips, and shows itself in deeds."
b) "Do we have to have your parents over this year?"
c) "Nah, sorry he's left early, try Monday"
d) "Well tell him it's closed and if he expects to get filled flat on his stop on a theoretical price he needs to go back to reality school"
e) all of the above

...................
And a final Topical Bonus Question

The Yen is

a) Fairly priced
b) Gonna be taken to Zimbabwe by Abe.
c) Yet another head fake.
d) The dusty old light sabre of the 1990's Jedi Macro Hedge Fund Knights and they are fingering the key to the sabre-cabinet again with a twinkle in their eyes.

Monday, November 19, 2012

We have felt like involuntary bungee jumpers over the last week, praying for the cord to tighten before we hit the concrete. This week sees old themes get rehashed but with Thanksgiving coming it's most likely to be a short term lottery, indeed many of the numbers before us might as well have been drawn from a basket. However as alternatives to the traditional Bingo calls, TMM would like to suggest more pertinent alternatives

Tuesday, November 13, 2012

"I am commenting for the first time to just point out that it feels like the global business cycle has finally turned, and bulls and bears alike are mistakenly attributing the risk-off nature of the past 2 months to the usual macro suspects of the past few years. Companies are making less money, plain and simple, and I see little to change that trend in 2013".

Being a pretty complex subject we thought that rather than bang out a quick comment, it is worth opening this up as a separate topic and turn our opinion on it into a post.

It is obvious that companies have made less money because Asia and Europe slowed.

China is turning back positive.

Europe is scaring the bejeezus out of many and whilst we will accept that the jury is out, we do think that it has passed the worst. PMIs that we believe have overstated weakness for a while, have stabilised and the current focus of German slowdown can be explained by them being "tail-end-Charlie" in the demand chain, so the full shock of weakness has only just hit them properly.

In the US we feel that with the election behind us there has been a reduction in uncertainty and the barrier to investment has been lifted. With that there is good reason to believe that Capex will ramp up into the spring and the employment situation with it. Put that together with the housing rebound and suddenly it looks like the demand side is lifting off again and with it, eventually, company earnings will recognise that interpretation of the situation. We would argue strongly that the evidence from 2004/5 would support that when Capex fell ahead of what was perceived a close election (as did consumption) there was a strong rebound in growth in Q1 2005 after the election.

The fact that consumer confidence and Capex intentions have parted ways so dramatically can be squared by viewing the world through this lens and given the consumer now has the ability to spend, corporates will have to catch up to meet that demand.

We understand that many want to view it like the 1990s stop-start cycle of Japan and it is certainly a valid position to take, but as Credit Suisse's Wilmot has pointed out, so far the recovery in IP from the recessionary depths has been largely in line with similar deep recession/recovery cycles. Historically, the next 6 months would be when it begins to accelerate. TMM are quite happy to bet that, as Wilmot argues, "This time is not different".

We understand that many want to view it like the 1990s stop-start cycle of Japan and it is certainly a valid position to take, which may well turn out to true. However, as Credit Suisse's Wilmot has pointed out, so far the recovery in IP from the recessionary depths has been largely in line with similar deep recession/recovery cycles. Historically, the next 6months would be when it begins to accelerate. TMM are quite happy to bet that, as Wilmot argues, indeed "This time is not different".

But TMM certainly are not afraid of humiliation. If they are wrong (we have been wrong many times before) and activity hasn't taken off by the summer, then it will be time to reassess. But to argue that we only face the Japanese outcome despite a great many differences, when the evidence so far suggests we are following normal deep cycles, seems to be somewhat tunnel-visioned. After all, the Japanese outcome is unique in this respect (so-far)

Market response: If even the EU and IMF cant agree on a package what hope for EU/IMF-Greece resolution? Bad news Greece is going to blow up. Sell Europe, sell "risk".

TMM response: It is preety clear that the IMF and EU are not going to let Greece go and just like TMM and Mrs TMM may fight over how to bring up the children, we certainly don't want them dead. Greece has funded all its bills today and the level of progress Greece has made with its budget is impressive. This is a non-story.

GERMAN ZEW INDEX FALLS TO MINUS 15.7 VS EST. GAIN TO MINUS 10

Market response: Germany is going down the pan as local sentiment is collapsing, this must be forward looking as to market price, so sell Europe.

TMM response: TMM have never understood why people look at the ZEW. It's a survey of "investors" not "business". The IFO is worth looking at, but not ZEW. Presumably if we going to react to investor sentiment surveys in this manner, we should be selling equities when the AAII Bearish sentiment survey shows people are bearish. Or buying USTs when the CFTC shows investors are bullish on bonds. Why do we view these as being counter-indicators, but the Zew as directional? Do we somehow think german private banks and funds know something special? Given they were the ones that bought all that fantasticly well-performing ABS CDOs and Southern Periphery debt, we are somewhat sceptical that they do not know much at all, other than how to buy structured toxic waste.

Monday, November 12, 2012

A US partial holiday today is being used as an excuse for quiet markets so micro-numbers are of little interest today. But the past week has seen some interesting news stories that TMM think are building into a theme.

Nanny State relaxation - Two US States legalise the recreational use of weed and then Denmark scraps it's " Fat Tax" on foods. TMM would like to think that this was a move away from the nanny statedom of "Thou shalt not consume things that you like that I think are bad for you (and I don't like anyway, but that could all change daily by Daily Mail edict)

Shoddy BBC Journalism -The BBC Director General resigns over shoddy Journalism. Yip diddly doo, perhaps someone will soon ask if shoddy journalism stretches into some more benign, though equally misbalanced, reporting of other subjects and hopefully we see a move away from styles that haven't improved since we wrote this . However the backlash of the moralisers over Entwistle's "Goodbye" payment is typically unthought out. "He's only been in the job 54 days". That post yes, but he's worked at the BBC for 23 years. So that's, what, 2 1/2 weeks pay for every year served? Not THAT excessive over the UK legal statutory minimum for redundancy of 1 1/2 weeks per year.

Figurehead caught fiddling with his author. TMM won't mention his name as he probably still has lots of friends reading this blog (under a mountain somewhere), but he has caught a version of Lance Armstrong disease. Symptoms being an institutional figurehead trusted to be the pillar of the establishment/sport found with a midriff resembling a toroid caused by the blast from their own petard, having just been hoisted with it . As our Doc friends would say "A lot of it around at the moment" .

4 ways of avoiding this outcome

1) Don't do it.
2) Don't get caught.
3) Write a computer code to do the job instead of you, make sure it has no human traits, then retire anonymously to Las Vegas (or Zurich in the case of UBS) and party up hard until you die of your own excesses or the algorithm fails. In which case deny it was your idea and point to a 25yr old quant.
4) Don't be a pompous arse stipulating lists of your own moral codes that you will then trip yourself up on. But make sure you don't damage anyone else in the process. Preferably start with, "Hey, I have few codes of conduct but will get the job done. Am I hired or what?". Berlusconi wrote the manual and Financial Institutions got away with this method pre 2008 until they started spreading the equivalent of STDs to their best friends.

But there is a theme running through all of the above stories. Whilst popularist policies such as freedom of choice we support, pillars of the establishment are now having their credentials examined in such a detailed manner (whether by social media or FBI agents) that we see these pillars falling around us. All well and good, but our worry is that edifices we actually need are being pulled down faster than they are being rebuilt.

Banks - Moral lepers in the populace eyes, but the populace has not yet found an alternative to their perceived evil.

BBC - Most trusted news source in the World (was) and now with a news department in shatters. Where do we turn ? Murdoch? really? Was it worth it?

The UK West Coast Main Line tender - What started as a moral crusade against Branson (= big corp.) vs "tax payer money" (= little man), turned out to be a dumbed down civil service error own goal and remains a mess.

On one hand we want our leaders, institutions and figureheads to be more understanding and representative of society's massed average, warts and all, and yet we also want them to be super-human in their own lives.

Is this a growing paradox that will either result in a mass dumbing down of service, ability and responsibility with strong leadership and policy succumbing to the twitterati? Or will the masses, having destroyed all around them, start to compromise on their "moral" demands in return for some pragmatism.

For now we watch with interest the latest moral lynching of companies that legally pay their tax somewhere with a lower tax rate and sincerely hope that society is not going to do its own "Petraeus" and trip itself up on its own moral rectitude.

Wednesday, November 07, 2012

This afternoon's dramatic moves lower in equities and oil have been pinned on Romney trades being unwound, but we do get the feeling that there is a lot of Price is News and tail chasing going on when very little has actually changed. We will go into whether that is the problem or not below, but for now are happy to concur with our faithful reader "Leftback" when answering the question of this morning's post "Now What?"

"The answer appears to be "throw all the toys out of the pram" this morning, or as the Australians say "spit the dummy". Of course there is a limit to the profit available on that trade once your favourite plastic rattle and squeaky ducky is on the floor." Indeed.

Historically the markets rally out of elections due to reduced uncertainty and we still believe that there is less uncertainty today than there was yesterday, but this post event dump is being blamed on Romney trade unwinds. It is surprising to TMM that so many had Romney win trades on but also for the following - Although politicians and pundits like to claim otherwise, the evidence is that tinkering with tax policy (US tax rates wouldn't exactly be out of whack with other G20 countries) does not materially affect economic outcomes to any real degree. Of course Wall Street, eyeing up their own tax rates wanted Romney, seemingly blind to the fact that slashing spending and tightening monetary policy at an economically fragile time would plunge the country back into recession, and somewhat ironically, hitting their own wealth via falls in the value of their assets (particularly bank equities). Indeed there is no free lunch in "Diner USA"

Beyond the whiplash in the CTA and 5 minute macro crew, excitement on Bloomberg chats about "poor price action" and many trying to argue that "the status quo is the worst of all possible outcomes", TMM would actually point out that Obama and the Democrats have been handed a pretty strong mandate here, despite Boehner's spin early this morning. The electoral college was definitive, with most of the swing states going Obama's way, and gains were made in both the Senate and the House. Add to that, the fact that Tea Party candidates failed to gain any mandate whatsoever, the apparent split in the Republican party over strategy (and likely infighting over the coming months as a new position is decided upon for the midterms) and it becomes clear that the path to a solution to the fiscal cliff has become much cleaner: -

- The hurdle in the house for compromise is lower, so fewer moderate Republicans will need to be persuaded to pass a plan

- There are reports of Nancy Pelosi being replaced by a more moderate democrat as minority leader. This also narrows the gap that needs to be bridged.

Whether measured by popular vote, electoral college, Senate or House, all either show a continued firm mandate for Obama and/or a swing toward the democratic position. It is thus exceptionally hard for Boehner et. al. to argue that they have a significant mandate for dramatic spending cuts and a rejection of any tax rises. Simply put, digging in their heels in the face of any compromise plan put on the table does not look like a credible strategy nor launch pad to the mid terms.

Finally, it is worth noting that President Clinton managed to get through his budgets after re-election, despite facing a Republican Senate and House. In yet another echo of the mid-90s, this came shortly after a government shutdown and debt ceiling debacle (cf Aug 2011)

Team Macro Man believe that the path to falling policy uncertainty began this week and the fiscal cliff may have to be downgraded to "road hump".

So that's that then. The US X-Factor is over, we hope the winner, as chosen by YOU the voting public, goes on to have many hits and the $6bio spent on producing the show are recovered through record sales. We know that Mitt really, really wanted it and his dream has been shattered but hey, you gotta give it 110% and he is really grateful to the voters for getting him this far, its been onehelluva experience he wouldn't have missed for the world, we are all really best buddies and he would just like to thank ... yaaawwwwn.

So what next ?

If you are a Republican market participant do you now -

a) Sell out all your fossil fuel investments

b) Buy gold as its obvious the US economy is now going to be a disaster and QE will run out of control (plan A).

c) Sell everything as doing so may push markets lower and the resultant price action can be held up as a vote of no confidence for Mr. O. whilst screaming "Money printing and Toldja so"

d) Nothing - you knew that Romney wouldn't get it anyway

e) Wonder what all the fuss is about, plan Thanksgiving and get back to trying to haul your yacht out of the trees in your neighbour's garden.

If you are a Democrat market participant do you now -

a) Stay in bed with a hangover after partying hard celebrating a win that you think makes you special.

TMM always tend to see election victory parties as a bit strange. Errrr ..you are sort of by definition representative of the largest chunk of the voting population so what's so special? In extremis if we had an arbitrary election to vote for either mass public puppy executions followed by global nuclear holocaust OR no change to current status quo, would a resultant massive global party as 99.9999% of the population celebrated their stunning victory over certain death REALLY be justified? If so, then in true "Olympic Economics" style, we ought to be running one every month.

b) Buy Gold as you need presents for christmas, and well, you can never wear enough gold.

c) Buy everything as doing so may push markets higher and the resultant price action can be held up as a vote of confidence for Mr. O. whilst screaming "Money printing and Toldja so"

d) Nothing - you knew Obama would get it anyway.

e) Wonder what all the fuss was about, plan Thanksgiving and get back to finding a job.

If you are Team Macro Man do you now -

a) Just buy the dip (JBFTD) as it straight-lines up til Xmas.

b) Sell Gold because we really dont think that Obamafication of the Bendral Reserve is going to directly lead to an inflation gift in our Christmas Stockings.

Tuesday, November 06, 2012

Today is box-ticking day in the US, but we really haven't got anything to add to the debate. Instead we are more interested in the data coming out of Europe and it is looking as though France really is in a spot of bother. TMM think they can hear a wistful tune emanating from the Elysee Palace